Health-care 'Cadillac' tax could be hurdle in auto talks

DETROIT — One part of the president's Affordable Care Act could become a key point of debate during UAW negotiations.

Beginning in 2018, any individual health insurance plan costing more than $10,200 annually or any family plan costing more than $27,500, will be subject to a 40% tax on the amount over those thresholds.

That would apply to the current UAW plan, which has no deductibles for those hired before 2007 and features generous benefits. The next UAW contract could stretch beyond 2018, and so the tax likely play a part in talks as the auto union looks to cover extra costs because of the tax.

UAW members won’t be paying. Health insurers will be assessed, or in the case of self-insured companies, it will fall to the employer.

Even so, the assumption is that insurers will pass on the cost of the tax through higher premiums.

“I don’t think it’s very fair of the U.S. government to penalize people for having a good health care plan,” UAW President Dennis Williams said in June.

On that the two sides agree: General Motors (GM), Ford (F) and Fiat Chrysler Automobiles (FCAU) also say punishing companies that provide better-than-average health insurance is unfair.

An individual health care plan costing, say, $15,000 a year, would trigger a tax of $1,920, 40% of the $4,800 over $10,200. A family plan costing $33,000 a year would incur a tax of $2,200, i.e. 40% of $5,500.

It’s not just about the UAW. The Cadillac tax affects those with jobs that offer high-end plans and their employers. So whether a union bargained for low-deductible, high-benefit plans, industry executives received amazing benefits, or anyone paid a few dollars for their prescriptions and a small fraction of a hospital bill, they likely will be faced with the tax or a higher premium because of it.

One of the goals of the Affordable Care Act is to reduce the cost of the most generous health care plans and replace them with taxable income. That part of the law won't take effect for more than two years and could change beforehand.

As it stands now, the tax would raise about $87 billion between 2018 and 2025, the Congressional Budget Office estimates. That revenue will help pay for the subsidized but less-generous plans now covering millions of people who previously were uninsured.

“This is a tax that no one wants to pay,” said Senior Vice President Larry Levitt of the Kaiser Family Foundation, a health policy research organization in Menlo Park, Calif. Adding to the pain for employers is that the tax is not deductible.

There’s no doubt that the UAW health care plan for Tier 1 workers — those hired before 2007 — has been the Cadillac standard in terms of generous benefits.

It has unlimited doctor’s office visits with $25 co-payments, $20 at Ford. Visits to urgent centers or emergency rooms carry co-pays of $50 and $100, respectively.

Prescription drug co-pays are $6 for generics, $12 for brand names and $17 for erectile dysfunction drugs. Mail-order co-pays are higher, but patients gets larger quantities by mail.

UAW members hired before 2007 pay no deductibles or co-insurance contributions with one exception. Choosing a doctor outside the preferred provider network means a member pays 20% above the first $100 of service.

Those hired since 2007 — the Tier 2 workers — pay $300 deductibles for individual coverage and families pay a $600 deductible. In addition, Tier 2 individual plans carry a 10% co-insurance contribution up to $700 a year with family plans incurring co-insurance of up to $1,400 a year.

The automakers don’t break down their UAW workers’ health insurance premium costs by family and individual, but data from each company show that they spend on average $14,800 a worker, including both single and family plans.

Most Tier 2 workers — those hired after 2007 — will not be subject to the Cadillac tax because their plans cost less than the tax’s thresholds, said Kristin Dziczek, director of Ann Arbor’s Center for Automotive Research industry and labor group.

Negotiations this year occur against the backdrop of two opposing ideas.

The UAW says workers gave wage concessions and sacrificed during the GM and Chrysler bankruptcies and automakers should give back now that they are making record profits and breaking sales records in North America.

The automakers argue that the industry goes in cycles and they cannot afford to slide backward into the bad habits that led to UAW contracts of the 1990s and early 2000s that increased Detroit Three labor costs far beyond Asian and German automakers with nonunion plants in the USA.

Those higher labor rates were among many factors that led to Chrysler's, Ford's and General Motors' financial troubles. The concessions that the UAW agreed to in 2007 and 2011 have only recently brought labor closer to their nonunion rivals.

The union formally began negotiations with FCA, Ford and GM in July in advance of the Sept. 14 expiration date of a four-year contract with all three automakers.

The law’s intention in the long run is not to collect more revenue but reduce the amount of health care that people use. By paying more of the cost, consumers will be more selective in seeking treatment, said Roberta Watson, head of employee benefits practice with the Wagner Law Group, which has offices in Boston; Palm Beach Gardens, Fla.; and San Francisco.

“The theory is that if people have more skin in the game they will put downward pressure on the cost of medical care,” Watson said.

For the auto workers, the solution may require sacrificing the bountiful medical coverage that has been touted as a trade-off for the absence of raises. Another option: Limit the new contract to two years through fall 2017 and hope to lobby Congress and the next administration to amend or repeal the tax.

But now that the Affordable Care Act has survived two Supreme Court challenges, repealing the tax is unlikely, said Kaiser Family Foundation’s Levitt, who adds that many nonunion workers and their employers will face the tax beginning in 2018.

“Unions are facing these issues sooner because these negotiations are happening now,” Levitt said.

But the framework of collective bargaining may lead to a more balanced solution.

“In the union setting, there’s more of a chance the company ends up offsetting the higher deductibles and co-pays by raising wages,” Watson said.